Over the last few months, the price of a bitcoin in USD blew up 6400% from $.50 to $32 before dropping as low as $15 over the last 2 days. This extreme market activity (along with the sensationalization of Silk Road) has caused a rapid increase in bitcoin investment and commentary. As a bitcoin enthusiast, I’ve decided to join the ranks of pro-bitcoin bloggers. This is at least partially a response to the lamestream meadia’s misunderstanding of and perhaps even hostility towards bitcoin. Keep reading for some analysis…

The following article presents a few nice examples of the misunderstanding and bad economics surrounding bitcoin:

But volatility is not inherently bad. One investor’s volatility is another’s opportunity. Mick’s suggestion of market closure as a means to prevent flash inflation/deflation is a terrible idea. I reject the valuation of de juro regulative “security” over the de facto loss of investor freedom. Bitcoin volatility represents the real risk involved in trading bitcoins. This risk is valuable information for investors and should not be obscured by the corrupting power of regulation. I would recommend that Mick study basic Austrian economics for more arguments against regulation.

But even if regulation were somehow a good idea, Mick’s regulatory proposal is effectively impossible. Since bitcoin markets are currently being developed as open source software, the barrier to creating a bitcoin market is very low. So, if any particular bitcoin market were to close during flash inflation/deflation, other markets would simply open or expand to accomodate the demand for transactions.

Finally, if stabilization is Mick’s goal, I believe that the market will naturally stabilize over the long term, as both the BT economy and international markets expand. It’s very possible that the market could collapse and stabilize at $0. But this is the nature of risk in a truly free market.

Despite Mick’s mischaracterization of bitcoin’s recent devaluation as a “depression” and his absurd regulatory proposal, his article does have some bright spots. Mick does an ok job describing bitcoin itself and addressing questions about anonymity. Mick also points out the real difficulty of bitcoin liquidity. Paypal has prohibited trading in bitcoins. Alternately, investors can transfer USD from their bank to dwolla to mtgox, but this process usually takes a few days. Bitcoin Money explains how this lag creates downward pressure on prices:

Bitcoin’s transaction volume is very active — over 10,000 transactions per day most recently. Those numbers show Bitcoin’s progress much more than what is said by the results of a price move when heavy selling is occurring. Those desiring to buy bitcoins at these selloff levels weren’t (and still aren’t) able to do so due to the delay in moving funds into the exchanges.

I agree with Mick that it would be great to debit BT. But credit purchases of BT are a terrible idea considering the ubiquity of credit card fraud. From this perspective the illiquidity of bitcoins is partially beneficial as an insulation from fraud.

Random Quote

“The Republican and Democratic parties are alike capitalist parties — differing only in being committed to different sets of capitalist interests — they have the same principles under varying colors, are equally corrupt and are one in their subservience to capital and their hostility to labor.”by Eugene V. Debs